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Competition, globalization and the decline of inflation
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Chen, Natalie, Imbs, Jean and Scott, Andrew (2004) Competition, globalization and the decline of inflation. Working Paper. Coventry: Centre for Economic Policy Research. CEPR Discussion Paper (No.DP4695). (Unpublished)
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Official URL: http://www.cepr.org/pubs/dps/DP4695.asp
Abstract
We investigate theoretically and empirically the competitive effects of increased trade on prices, productivity and markups. Using disaggregated data for EU manufacturing over the period 1988-2000 we find increased openness exerts a negative and significant impact on sectoral prices. Increased openness lowers prices by both reducing markups and raising productivity. In response to an increase in openness, markups show a steep short run decline, which partly reverses later, while productivity rises in a manner that increases over time. Our estimates suggest that EU manufacturing prices fell by 2.3%, productivity rose by 11% and markups fell by 1.6% in response to the observed increase in manufacturing imports. The direct price restraint caused by greater imports, assuming unchanged monetary policy, can explain a fall in inflation of up to 0.14% per annum. The most substantial impact on inflation arises, however, from the role of lower markups in reducing the inflation bias of monetary policy. Our results suggest that increased trade could account for as much as a quarter of European disinflation over this period.
| Item Type: | Working or Discussion Paper (Working Paper) | ||||
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| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions |
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| Divisions: | Faculty of Social Sciences > Economics | ||||
| Series Name: | CEPR Discussion Paper | ||||
| Publisher: | Centre for Economic Policy Research | ||||
| Place of Publication: | Coventry | ||||
| Official Date: | October 2004 | ||||
| Dates: |
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| Number: | No.DP4695 | ||||
| Status: | Not Peer Reviewed | ||||
| Publication Status: | Unpublished | ||||
| Access rights to Published version: | Restricted or Subscription Access | ||||
| Version or Related Resource: | Published version appears in WRAP (http://wrap.warwick.ac.uk/28582/) | ||||
| Related URLs: |
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